Cut the Growth of Federal Spending

One of Furman’s and Summers’s arguments was that the main culprit behind higher deficits was tax cuts, not increases in government spending on entitlements. They wrote:

The tax cuts passed by Presidents George W. Bush and Donald Trump totaled 3 percent of GDP—much more than the projected increases in entitlement spending over the next thirty years. Those cuts meant that in 2018, the federal government took in revenue equivalent to just 16 percent of GDP, the lowest level in half a century, except for a few brief periods in the aftermath of recessions.

But that argument no longer holds water. In 2023, according to the Congressional Budget Office, federal revenue will be 18.4 percent of GDP. That’s 1.2 percentage points above its 17.2 percent average in the thirty years from 1993 to 2022. And, more relevant to Furman’s and Summers’s argument, it’s over 2 percentage points above the 16 percent on which they grounded much of their argument.

On the spending side in 2023, the CBO estimates, federal government outlays, which averaged 21.0 percent of GDP between 1993 and 2022, will be a whopping 24.2 percent of GDP. In short, the higher deficits are largely a result of spending increases, not tax cuts.

This is from David R. Henderson, “To Tame Deficits, Cut Spending Growth,” Defining Ideas, August 3, 2023.

An excerpt on taxes:

The other practical problem with raising taxes is that overall federal tax revenues as a percent of GDP appear to be a political constant. Since the end of the Korean War in 1953, except during deep recessions, they have rarely dropped below 16 percent and have rarely increased beyond 19 percent of GDP. Indeed, when they do pierce the 19 percent ceiling, we get tax cuts, as with Ronald Reagan in 1981 and George W. Bush in 2001.

It’s difficult to know why this is a political constant. My own view is that the majority of Americans still object to large government and they see taxes as the price of government. They really should see government spending as the main price of government, but they don’t see government spending on their pay stub. But we don’t necessarily need to know why this political constant exists to know that it does. So there’s a good case to be made that we are “stuck” with federal tax revenues being below 19 percent of GDP.

Read the whole thing.